Exchange rates and monetary policy uncertainty

Mueller, Philippe, Tahbaz-Salehi, Alireza and Vedolin, Andrea (2017) Exchange rates and monetary policy uncertainty. Journal of Finance, 72 (3). 1213 - 1252. ISSN 0022-1082

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Abstract

We document that a trading strategy that is short the U.S. dollar and long other currencies exhibits significantly larger excess returns on days with scheduled Federal Open Market Committee (FOMC) announcements. We show that these excess returns (i) are higher for currencies with higher interest rate differentials vis-à-vis the United States, (ii) increase with uncertainty about monetary policy, and (iii) increase further when the Federal Reserve adopts a policy of monetary easing. We interpret these excess returns as compensation for monetary policy uncertainty within a parsimonious model of constrained financiers who intermediate global demand for currencies.

Item Type:	Article
Official URL:	https://onlinelibrary.wiley.com/journal/15406261
Additional Information:	© 2017 American Finance Association
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	16 May 2017 13:49
Last Modified:	15 Apr 2024 23:13
Projects:	ES/K002309/1, ES/K002309/1
Funders:	Economic and Social Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/77256

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